Japan Brief / FPCJ, No. 0867
　　　　
November 11, 2008

Outlook for Japanese Economy Grows Grimmer; Corporate Profits Shrink

Japan saw new signs of a grimmer economic outlook emerge during the week of November 2, while the government and lawmakers continued work to flesh out the economic stimulus package announced by Prime Minister Taro Aso on October 30.

On November 8, the Nihon Keizai Shimbun, Inc., the publisher of The Nikkei business daily, released the results of its survey of 989 listed companies’ earnings outlooks for the business year ending next March 31. Those companies reported that their earnings would decline 26% from the preceding year. The depth of the decline forecast is particularly marked among manufacturers such as automakers and electric appliance makers, whose earnings had risen steadily for six consecutive years. Slumping overseas markets and the sharp appreciation of the yen explained the deteriorating outlook.

Toyota Motor Co. Ltd., the paragon of Japanese automakers and, indeed, of the export-led manufacturing sector, made headlines on November 6 by announcing that its operating profit for the current business year would plunge 74%, from the previous year, to 600 billion yen. This would be 1,000 billion yen less than the automaker’s initial forecast. Toyota’s profits during the April-September period of this year amounted to 582 billion yen, down 54% year over year.

Toyota’s woes are shared by the other Japanese automakers. The seven major automakers’ combined earnings are projected to decline by 2,800 billion yen, or 62%, to 1,683 billion yen for the current business year. The harsh business conditions Japanese automakers face coincide with even graver crises at their U.S. counterparts, such as General Motors and Ford.

Apparently alarmed at the precipitous deterioration of the auto industry worldwide, two of Japan’s major newspapers published editorials on the subject. The Asahi Shimbun said in its November 9 editorial: “Whether the auto industry can lead the world of the 21st century depends on its capacity for self-driven reform to cope with the changing tide of events. Their first task should be to do everything in their power to develop environmentally sound cars that break the petroleum dependency. That would enable them to capture new demand in the developed countries.” The Mainichi Shimbun said on the same day that “Not only Toyota but the export sector as a whole is seeing its business environment deteriorating rapidly, with an additional blow coming from the sharp appreciation of the yen. What we might call the cheap yen bubble has burst.”

Interest Rate Cut and Other Measures for Stabilization
The Bank of Japan lowered the benchmark interest rate by 0.2 points to 0.3%, on October 31, its first rate cut in 7 years and 7 months. It also revised downward its estimate of the economic growth rate in fiscal 2009, to 0.6%, from the 1.5% it had projected in July. Japan’s 20 leading research institutions’ estimates of the growth rate for the July-September period of this year averaged minus 0.04% as of early November.

The Bank of Japan rate cut was made in parallel with other major central banks’ moves to counter the credit crunch. On October 30, the U.S. Federal Reserve lowered its benchmark rate by 0.5 points, to 1.5%, while the European Central Bank followed suit on November 6, cutting its rate by 0.5 points, to 3.25%, with the Bank of England slashing its rate by an unusually large margin of 1.5 points, to 3%. These moves led the Mainichi Shimbun to express its concern that “a new kind of distortion in monetary flows might develop if the world’s two largest economies, the United States and Japan, both must continue their ultra-low interest rate policies. Major countries’ central banks must give full consideration to the side-effects of low interest rates.”

Meanwhile, Japan’s ruling party leaders, including Prime Minister Aso, Finance Minister Shoichi Nakagawa, and Economics Minister Kaoru Yosano, are still divided about the final form of the “fixed-sum benefit,” the centerpiece of the government’s 5 trillion yen additional stimulus package. The question is where to draw the line to restrict the distribution of the 2 trillion yen benefits to those families and persons who “really need it.” Initially, the benefit was supposed to be provided to every family, irrespective of its income level, but an objection has been raised to the inclusion of “rich people” among the recipients.

The Bill for Strengthening Financial Functions, which will enable public funds to be injected into financial institutions if need be, was passed by Japan’s lower house on November 6, but it faces tough going in the upper house, since the opposition is demanding that stricter conditions be attached to its application to certain small-scale institutions. The Nikkei’s November 8 editorial warned against turning the bill into an object of political haggling “as it is essential to have a safety net ready to nip in the bud the spreading of concern about the nation’s financial system, even though it does look comparatively stable.”

In a related move to add to the stability of financial institutions, the Financial Services Agency announced on November 7 a revision of its capital ratio rule to allow financial institutions to waive stating part of the lowered book value of securities holdings in their portfolios. The temporary measure, to be in effect from the December 2008 to March 2012 accounting periods, is aimed at regional banks and other smaller financial institutions. It will protect their capital ratios against erosion from stock price declines.

(Copyright 2008 Foreign Press Center / Japan)